Bond market hitting cities, schools, hospitals in pocketbook

H. Rick Bamman - hbamman@kcchronicle.com Workers from Boller construction prepare footings at the site of the new fire station next to Century Station on north 1st St. The City of St. Charles has issued $13.4 million in bonds for an addition to the fire station and a new riverwall. It will cost them more for the project this year than previous years because market conditions are not good for municipal bonds. The situation is forcing municipalities to choose between paying more or delaying projects.

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Normally, finding a buyer would not produce a sense of relief at St. Charles City Hall.

But as Chris Minick knows, these are not normal times.

"We had six bidders step forward," said Minick, the city of St. Charles' finance director. "We were pleasantly surprised."

This week, the city completed the sale of about $13.4 million in bonds to help finance the construction of the new Century Station fire station downtown and a new river wall along the Fox River at City Hall.

For all intents and purposes, the sale of the debt obligations went off without a hitch. But there was a catch, as the city needed to guarantee a return of 5.15 percent in interest on the bonds.

A year ago, that would have fetched a return of almost 1 percent less, Minick said. And that difference will end up costing the city more.

Across the country, however, St. Charles has some very good company.

The situation began earlier this year as investors began to lose confidence in stocks and a host of other securities. The losses on Wall Street sent investors scurrying to the relative safety of  U.S. Treasury bonds, leaving behind even investments like municipal bonds, or the bonds issued by cities, school districts and the like to finance capital improvement projects like new roads, bridges, schools, fire stations and river walls, among others.

That, in turn, has forced those selling municipal bonds to drive down the price to find buyers, which in turn has driven up the yield, or the interest rate paid by those issuing the bonds.

That situation has created some solid opportunities for some investors willing to assume a certain level of risk, said financial adviser David Brady of Brady Investment Counsel of Geneva. 

Brady noted that the rush to the safety of the treasury has beaten down returns on the treasury notes. A three-month treasury note, for instance, presently is yielding a zero return. By contrast, a generic municipal bond could yield well more than 4 percent in most instances.

'Demand for these things (municipal bonds) is almost non-existent," Brady said. "So we're telling our clients that now would be a good time to assume the risk if they are diversified and stick to the high quality stuff."

But while it could represent a good deal for some investors, the situation is much less pleasant for those issuing the bonds.

In many instances, the level of risk associated with municipal bonds and the uncertainty in the market has made buyers of the bonds harder to come by. Last week, for instance, the Port Authority of New York and New Jersey failed to find buyers for $300 million in bonds.

When combined with the higher interest that must be paid to sell the bonds, the market conditions are leading some taxing bodies to simply stay on the sidelines until market conditions improve or the need is too great to wait any longer.

"For some of these guys, it is really tough sledding right now," Brady said.

The situation has hit hospitals, as well. The American Hospital Association reported in November that hospitals paid 15 percent more in interest payments from July to September this year than they did in the same period in 2007.

That has led as many as 56 percent of health care organizations in the U.S., including Provena and Advocate, to shelve projects to either build new facilities or expand existing ones, the AHA said.

And at the Geneva School District, district leaders opted to wait until a later date to move forward with plans to ask voters for permission to issue up to $85 million in bonds to finance work at Geneva High School.

Superintendent Kent Mutchler said such a bond issue would have pushed the district into levels of indebtedness the Board of Education felt was not prudent, given current market conditions.

"Basically, this was not good timing for this," he said. "It just wouldn't make sense to move forward with this right now."